Abstract
Abstract We first describe the competitive equilibrium of frictionless insurance markets with symmetric information. Risks are insurable in this economy in the sense that all mutually advantageous risk exchanges are realized at equilibrium. We then provide various reasons why many risks cannot be efficiently shared in our decentralized economy. Transaction costs, adverse selection, moral hazard, insurance fraud, and the inexistence of an objective distribution function do generate an insurability problem that requires public intervention. The heterogeneity of beliefs and the difficulties in diversifying individual risks are other reasons why some risks are not insurable, but this does not mean that insurance markets are inefficient.
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